We’ve heard of peak auto for the last few years. So are we there yet? Perhaps. General Motors Company (NYSE:GM) stock has rallied 15% in one month and nearly 30% since May. For the past 12 months, Ford Motor Company (NYSE:F) is flat while GM is up 32%.
Today I want to short GM stock for a trade. I believe that expectations are too high. These have been recently juiced even higher on the idea that the unfortunate Texas floods will cause a spike in stock performance.
I don’t dispute the fact that vehicle sales could benefit from an infusion of buyers, but Wall Street usually prices in known events far in advance. This headline has crossed the ticker tape enough times that most of the benefit to the stock is already baked in.
Click to Enlarge Today’s write up doesn’t mean that I hate the stock. I recently shared opinions that GM was looking strong, more so than Ford. I still believe it but after this spike I want to short General Motors for a trade.
Before you send out the posse after me for shorting a good ole American stock, I did say for a trade. This is not to say that I think GM is a bad company. I am merely betting that it could see a dip soon and I want to capture it.
No, I won’t sell the stock short outright, as it would expose me to unlimited losses. Instead, I will use GM options where the cost to short via puts is limited to the cost of entry. I will make it even easier to profit by eliminating my entry cost.
Even though I am shorting it today, GM is cheap from an absolute valuation perspective. Its price-to-earnings ratio is half of that of Ford’s. Yet I chose to short GM because it has the farther to fall given that it’s at new highs.
Technically, this is not an obvious spot to short GM, but since I am using its own value against it I am willing to take the risk. I am not looking for a complete breakdown in the stock. I will thread the needle for a bearish trade into December which I will set in two tranches, one bearish and another bullish one to finance it.
GM Stock Trade Ideas
The Bearish Side: Buy GM Dec debit $41/$40 put spread for 30 cents per contract. This is a bearish bet where I need price to fall through my spread so I can triple my money.
But to eliminate my out-of-pocket risk, I will also sell downside risk against proven support level.
The Bank (Optional): Sell GM Feb $36 put naked and collect 50 cents per contract to open. This is a bullish trade where I have 85% theoretical chance that price will stay above my sold put.
Taking both trades means that I am getting paid to short GM through December. And as long as price stays above my sold put, any premium I recover from selling my bearish bet would be pure extra profit. So essentially I am already a winner but ideally and to maximize profits, I need GM stock to fall through $40 per share but stabilize above $36 through February.
If the price falls below my sold puts then I book my profits in the bearish bet and would own General Motors stock at a 15% discount from here. This is currently a cheap stock. Its price-to-book is 1.4, so I would be more than glad to hold the shares. I am confident that I will be able to manage that risk successfully into early 2018.
Investing is risky, so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
